What does preference mean in bankruptcy?

A “preference” is defined by Section 547 of the Bankruptcy Code as: … To a non-insider creditor, within 90 days of the filing of the bankruptcy; That allows the creditor to receive more on its claim than it would have, had the payment not been made and the claim paid through the bankruptcy proceeding.

Is a preferential transfer?

A preferential transfer is defined as any payment of money or transfer of property made by a debtor where: The transfer was made to or for the benefit of a creditor; The transfer was made for or on account of a debt that was owed before the transfer was made; The transfer was made while the debtor was insolvent.

What constitutes a preference in bankruptcy law when is a trustee able to avoid preferential transfers?

The primary “new value” exceptions can be found in section 547(c)(1) and (4) of the Bankruptcy Code. They generally prevent the trustee from avoiding preferential transfers when the transfer was made in exchange for something that increases, or at least does not deplete, the debtor’s assets.

What is a preferential payout?

In short, a preferential payment means in effect that a company in trouble has made payments to unsecured creditors ahead of secured creditors without a sound reason to do so other than following the personal preferences of the Directors.

What are the types of preferential creditors?

  • Fixed charge holders.
  • Liquidators’ fees and expenses.
  • Preferred creditors.
  • Floating charge holders.
  • Unsecured creditors.
  • Interest incurred on all unsecured debts post-liquidation.
  • Shareholders.

What is a preference claim?

A preference claim is brought by the bankruptcy trustee against creditors paid within a certain period prior to the debtor filing for bankruptcy. These claims are sometimes colloquially referred to as “claw-back” claims.

What are unfair preference payments?

An unfair preference is a transaction (commonly a payment of funds or a transfer of assets) entered into by an insolvent company which provides an unsecured creditor of the company who received the benefit of the transaction with a priority or advantage over other creditors.

What is a preference recovery?

Preference actions allow a trustee or debtor-in- possession to recover payments received by a creditor during the period immediately preceding the bank- ruptcy filing.

What is an unfair preference claim?

An unfair preference is precisely as the name describes – payments or transfers of assets that give a creditor an advantage over other creditors. Liquidators appointed to companies can recover such unfair preferences to distribute equally among the creditors.

How do you avoid preference payments?

Put the Debtor on Cash-in-Advance Terms. This is the best and easiest way to avoid a preferential transfer. By its own terms, a cash-in-advance payment is not a preferential transfer because the debtor is not making payment for an antecedent debt.

What is a voidable preference?

An unfair preference (or “voidable preference”) is a legal term arising in bankruptcy law where a person or company transfers assets or pays a debt to a creditor shortly before going into bankruptcy, that payment or transfer can be set aside on the application of the liquidator or trustee in bankruptcy as an unfair …

What is a relation back period?

The relation back day is the date by which the prescribed period begins whereby transactions entered into by the company may be considered void.

How long is the preference period?

The “preference period” is 90 days prior to the bankruptcy filing for typical creditors and 1 year for “insiders.” Insiders are defined as relatives of the debtor, a general partner of the debtor, or, if the debtor is a corporation, officers, directors, or a person in control of the company.

Which of the following is a preferential transfer?

A preferential transfer is a payment a debtor makes to one or more creditors before filing for bankruptcy that results in paying back an unequal amount of debt to their other creditors. It gives preferential treatment to some creditors over others, and a bankruptcy trustee may decide to claw back the payment.

What is preference risk?

To add insult to injury, there is a risk that any recently received payment or settlement might be recaptured by the bankruptcy trustee as a preferential transfer or “preference.”